After a nine- hour RBI board meeting on Monday, RBI has decided to make concessions on capital adequacy and referred the reserves issue to an expert panel

The government and RBI have been sparring over how much capital the central bank needs and how tough its lending rules should be. Photo: Reuters

Mumbai/New Delhi: In the end, expectations of an escalation of the confrontation were belied. The government and the Reserve Bank of India (RBI) stepped back from the brink and found a middle ground, giving both sides crucial space to revisit their positions.

Given that the contentious issue of liquidity—particularly pertaining to non-banking financial companies (NBFCs)—is yet to be addressed to the satisfaction of the union government, the truce is an uneasy one. The finance ministry believes NBFCs are facing an acute liquidity crisis, which was spilling over into the real estate sector and small businesses.

Further, the board did not yield to demands of bringing down the capital adequacy ratio in line with bare minimum levels prescribed by Basel III norms. However, it has yielded and provided another year for implementation of the capital conservation buffers.

“The Board, while deciding to retain the CRAR (capital to risk weighted asset ratio) at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020,” RBI said in the statement.

The issue of easing the prompt corrective action (PCA) framework for weak banks has also been referred to a committee, with the government pushing for a review to allow a few state-run banks out of this framework. Eleven of the 21 state-run banks are under RBI’s PCA framework, which the government believes is restricting credit flow to key sectors of the economy, including MSMEs.

“The meeting was very comprehensive and ended on a cordial note and did not see any voting by members,” said a board member on condition of anonymity.

The next meeting of the RBI board is likely to take place on 14 December.